Virtual Economic Theory: How MMOs Really Work

[What makes MMO economies tick? Here's a look at several different games and real-world economic theory to explain the mechanisms that govern value to players, and how to design an economy that best serves your players and you.]

This article basically grew out of my somewhat "rantish" review of Final Fantasy XIV. One of the biggest issues that I -- and manyothercommentators -- have taken issue with is the way FFXIV handles its in-game economy: the Market Ward system.

My intent with this article is to first address the broader issue of virtual economies in MMORPGs in general, and apply those theories to FFXIV to better explain exactly what is wrong with the Market Ward system.

Wayback Machine: Asheron's Call

I'd like to begin with a journey back to my very first MMORPG: Asheron's Call. AC was one of the three "golden oldies," the MMOs that started it all, as it were. Along with Ultima Online and EverQuest, many of the standards in today's online games found their origins here.

Of particular interest was the development of the virtual economy in Asheron's Call. There were a few major factors that shaped AC's economy: firstly, that money had weight and was, either in coin or writ form, cumbersome and risky to possess; secondly, that the game had no market system whatsoever and didn't even have a secure trade feature (it was added much later); and thirdly, that some of the game's most sought-after weapons and armor were crafted from ubiquitous Pyreal Motes and Crystal Shards.

Putting aside some of the more flavorful quirks of early Asheron's Call -- things that led to the commonplace inscription of item stats and the cataclysmic destruction of Arwic -- I'd like to focus on how players engaged in the most basic economic activity: trading.

Because there was very little economic motivation to amass money in Asheron's Call, economic activity in the game was minimal. Furthermore, the lack of any crafting system and related resource-gathering system meant that players, by and large, didn't acquire much "stuff" to sell to others; most of what was looted was vendor trash. Rarely, a particularly good piece of equipment would drop, and players figured it would be more valuable traded to another than sold to the vendor. But what would they want to trade it for? Not money.

Players instead defaulted to a more limited barter system. The "currency" of the market became the desirable motes and shards, items that everyone wanted. These became so common that players would list the items they wished to "sell" on forums and attached to each a price in motes and shards.

Even more enterprising economists would analyze the market and the frequency of motes and shards and would maintain a "currency exchange rate" between coin, motes, and shards, for those wanting to make sure they were getting a fair deal. In the absence of monetary value, motes and shards became the de-facto currency of Dereth.

Asheron's Call

Prior to an actual exchange taking place, players need a means of communicating their desire to buy or sell an item to one another. This communication took place in two main formats: through external means (mainly forums where people posted what items they had for sale or wanted to buy) and through internal means (mainly players standing around in Arwic /shouting the items they wanted to sell). Players interested in "shopping" would either visit the forums or Arwic and hope to find something they were interested in buying.

In Asheron's Call, this economic activity was generally viable thanks to a very significant factor: there wasn't very much to trade. The items being exchanged were randomly-generated loot, within which there were a relatively small subset of factors determining the value of those items.

For example, crossbows would have damage modifiers; the most desirable crossbow had the highest damage modifier. All magical effects on items in Asheron's Call were spells that could be cast by players, so magical properties were of lesser consideration than the base numbers. As a result, when players went to market, they basically had one item type they wanted and basically just wanted the best available of that type.

And so, long before the days of auction houses or bazaars, the motes and shards would flow in the rather primitive Derethian economy.

Intro to Economic Theory

Economic theory is based on the notions of Perfect Market Competition, the ideal conditions for economic behaviour that, sadly, elude us in the real world.

However, in virtual worlds, many of the otherwise untenable features manifest themselves: there tend to be no barriers to entry, as every player has the same intrinsic capability to engage in any of the game's internal economic activities (harvesting, crafting, trading, etc.); factors of production tend to be highly mobile in most games (once you can craft something, you can do so anywhere, at any time, without an investment in capital); products are homogeneous (all healing potions are exactly the same; all crafted Scorpion Harnesses are identical); and there are constant returns to scale (no matter how many potions you make, it still costs the same to produce each one).

This means that many of the core theories of economics, those of supply, demand, marginal revenue and the like, can be applied fairly directly to MMORPG virtual economies. The key issue -- and, as we shall see, the dominant one in virtual economic theory -- is how a game designs its market around the concept of perfect information.

Perfect Information means that all producers and consumers know the price and quality of all goods. In the case of quality of goods, most games do present that exact information to players. In World of Warcraft, you can hover your mouse over an item and a pop-up box lists every relevant statistic for that item. Is this sword better than that sword?

The player has all the information necessary to make that judgment. There is no question of material quality, branding, or any other factors other than actual performance of an item when determining its value (aside from aesthetic purchase decisions). It doesn't make any difference whatsoever who makes or who sells you an item: it's the exact same item every time. The issue, then, is whether or not players know the price of an item.

The price of anything is what its purchaser will pay for it, as we all know. However, the value of an item is its opportunity cost: the cost to obtain that item. In MMORPGs, the "price" players inherently "pay" for everything is time: the cost of an herb that takes 10 minutes to harvest is 10 minutes of time.

In order to extrapolate the value of time, players merely need to determine what activities they could be spending that time doing: if, in 10 minutes, you could harvest one herb, five pieces of ore, or get 10 gold, then the value of 10 minutes is one herb, five ore, or 10 gold. Most things in an MMORPG can be derived from their time-based cost, because most things can be acquired merely as a matter of time.

A rare item that only has a 5 percent drop rate from a rare monster that only spawns once an hour has an opportunity cost of about 20 hours. Because chance is involved, the actual cost to any given player will vary: some people will "pay" a lot of time and never get it; others will stumble across the monster and get the item with very little cost.

In any case, if players value things in terms of time, then they can determine what they would be better off doing with their time. Continuing from our earlier example, if five ore sells on the auction house for five gold, then you would be better off getting gold and buying ore than harvesting the ore yourself. This notion of "better off" is another of the tenants of perfect competition: each player should be a profit maximizer.

Players are not necessarily profit maximizers. Ultimately, players are playing a game to have fun, and this "fun factor" cannot be discounted in virtual economics. If it is significantly more fun to mine five ore than to get 10 gold, players might prefer to harvest the ore themselves rather than buy it, simply because they find the activity more pleasurable, even if the economic outcome is unfavourable.

This fun-seeking behavior can cause market irregularities: for example, if the majority of players enjoy mining a lot, the market for ore might become depressed as many players mine it and attempt to sell it -- given there are few players interested in buying it.

This example does raise a crucial point: the deflation in the value of ore does not come from a glut in supply, but rather from a glut in suppliers. The prices are not low simply because there is a lot of ore in existence, but because players are harvesting it and placing it on the market at a higher rate than players are consuming it and buying it from the market.